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Bankruptcy Myths

November 30th, 2018 at 5:37 pm

Texas bankruptcy lawyerMost of the time when you are dealing with legal matters, it is not a simple situation to be in. This is especially true when it comes to bankruptcy. In the United States, there are a handful of different types of bankruptcies that individuals can qualify for, each with their own stipulations and requirements for eligibility. Even beginning the process of determining whether or not you are eligible for bankruptcy can be confusing, especially when there are so many myths and misconceptions surrounding this topic. Here are three of those myths and the actual truth behind them.

Only People Who Are Frivolous with Money File for Bankruptcy

While it makes logical sense, it just is not true. Many people get themselves into debt and file for bankruptcy. Sometimes, people think that those who file for bankruptcy just do not want to pay back their debts, but often, it is the opposite. Many people who end up filing for bankruptcy have explored all of their other options and tried almost everything they could to get out of debt before filing for bankruptcy. Courts will not consider:

All of Your Debt Will Be Wiped Out After a Bankruptcy

Most of your types of debt can be relieved with a Chapter 7 or Chapter 13 bankruptcy, but there are still some kinds of debt that cannot be wiped out when you file. Some types of debt that cannot be relieved include:

  • Child support or spousal support obligations;
  • Student loan debt;
  • Restitution for any crimes you have committed; and
  • Tax debts.

A Bankruptcy Will Ruin Your Credit

While you will definitely see a drop in your credit score, it will not last forever. Some credit card and loan companies will not allow you to borrow from them and the ones that do allow you to borrow will typically charge you higher interest rates. Your credit score will likely recover shortly after you file for bankruptcy, but the bankruptcy will stay on your credit report for seven to 10 years.

A New Braunfels Bankruptcy Lawyer Can Help You Get Back on Your Feet

You may think that a bankruptcy will ruin your finances forever, but it will not – it will just take a few years to get you back to where you were pre-bankruptcy. If you think that a bankruptcy is the best option for you to take control of your debt, you need the help and guidance of a Kerrville bankruptcy lawyer. The Law Offices of Chance M. McGee can guide you through the bankruptcy process from start to finish and provide you with the necessary advice and resources that you need to have a successful bankruptcy case. To schedule a consultation, call our office today at 210-342-3400.

 

Sources:

https://www.nerdwallet.com/blog/finance/5-bankruptcy-myths-dispelled/

https://blog.credit.com/2018/03/7-bankruptcy-myths-debunked-64540/

https://www.creditcards.com/credit-card-news/5-bankruptcy-myths-busted-1282.php

Fraudulent Transfers Around the Holidays

November 26th, 2018 at 8:00 am

Giving a gift, including selling for much less than an asset is worth, may be a fraudulent transfer—treated as hiding assets from creditors.

 

Most people filing bankruptcy have neither a need nor the desire to hide anything from their creditors. There’s no need because most people’s assets are already protected through state and federal laws. There’s no desire because most people are honest and want to follow the law.

Yet anybody considering bankruptcy should still have some understanding of the law of “fraudulent transfers.” That’s because it could cause you problems even if you thought you were being honest and fair. As you’ll see this may more likely happen during the gift-giving holiday season.

“Fraudulent Transfers” Explained

A “fraudulent transfer” is essentially a debtor giving away—transferring—an asset to avoiding giving creditors that asset’s value. This can be done with bad intentions, but also without any such intentions.

If you give away something (for example, as a holiday gift), or sell something for much less than it’s worth, then under certain circumstances your creditors could require the recipient to surrender it to the creditors. That would usually not be a good result because you’d prefer that the person be able to keep your gift.

The gift or sale in a “fraudulent transfer” can be challenged in either state courts or bankruptcy court. In a bankruptcy case the bankruptcy trustee would act on behalf of the creditors to “avoid” (undo) the transfer.

The Two Kinds of “Fraudulent Transfers”

There are two kinds of fraudulent transfers.

The one based on “actual fraud” requires the actual intent to harm a creditor or creditors. It occurs when a debtor gives a gift or makes a transfer “with actual intent to hinder, delay, or defraud” one or more creditors. Section 548(a)(1)(A) of the U.S. Bankruptcy Code.

The one based on “constructive fraud” does not require the actual intent to harm a creditor. It occurs when a debtor gives a gift or makes a transfer receiving “less than a reasonably equivalent value in exchange, in which the debtor “was insolvent on the date that such transfer was made.  . .  , or became insolvent as a result of such transfer.” Section 548(a)(1)(B) of the Bankruptcy Code. Although the debtor does not intend to defraud anybody, the transfer can be undone under certain circumstances.

Legal and Practical Considerations

Most people filing bankruptcy will not be accused of a fraudulent transfer for a number of reasons:

1) Most people simply don’t give away their assets leading up to filing bankruptcy.

2) Gifts to charities are largely exempt.

3) The bankruptcy system doesn’t care about minor gifts or transfers.

4) Even in circumstances that a transfer could be challenged, the trustee has to consider the cost and practicality of undoing the transfer.

1) Debtors Don’t Generally Give Away Assets

Most people considering bankruptcy usually need pretty much everything they own. So they aren’t going to be giving it away or selling it for less than it’s worth.

Furthermore, the assets that people own when filing bankruptcy are usually fully protected. So there’s no motivation to transfer them away.  These protections are usually through property “exemptions,” or through the special advantages of the Chapter 13 “adjustment of debts.”

2) Gifts to Charities Are Essentially Exempt

The Bankruptcy Code creates a big exception for transfers made “to a qualified religious or charitable entity or organization.” Charitable contributions are exempt if they do “not exceed 15 percent of the gross annual income of the debtor.” The amount of contributions can total an even higher percentage “if the transfer was consistent with the practices of the debtor.” Section 548(a)(2).  

3) Minor Gifts Are Not a Problem

The bankruptcy system doesn’t worry about relatively minor gifts or transfers. This effectively means a gift or gifts given over the course of two years to any particular person valued at $600 or less. The Bankruptcy Code itself does not refer to that threshold amount. But the Statement of Financial Affairs for Individuals, which is one of the official documents you and your bankruptcy lawyer prepare and file at court does so.

This document includes the following question #13:

Within 2 years before you filed for bankruptcy, did you give any gifts with a total value of more than $600 per person?

The next question (#14) is very similar:                                            

Within 2 years before you filed for bankruptcy, did you give any gifts or contributions with a total value of more than $600 to any charity?

4) Cost and Practicality of Avoiding the Transfer

Even when a gift or other transfer arguably qualifies as a “fraudulent transfer,” the trustee has to seriously consider the costs in attorney fees and other expenses to try to undo that gift or transfer. At the very least the costs have to be weighed against the amount likely to be gained for the creditors.

This is particularly true when there’s a meaningful risk that the transfer would not qualify as a “fraudulent transfer.” Or the transfer may qualify but the transferee has disappeared or a judgment against him or her is uncollectable.

 

An Example Why Passing the Means Test May Be Easier in 2018

November 19th, 2018 at 8:00 am

Filing bankruptcy before the end of December may help you qualify for Chapter 7 bankruptcy. Here’s an example showing how this could work.  

 

The month of December is the month that people receive more income than any other month of the year. According to the federal Bureau of Economic Analysis (part of the U.S. Department of Commerce), for at least the past 9 years (2009 through 2017) U.S. personal income was the highest in December than in any other calendar month.

This may well be true for you personally. You may work a part-time seasonal job this time of year to help make ends meet. You may be getting a few larger paychecks because of more work hours or overtime. Or you may be fortunate enough to get a holiday or year-end bonus.

Last week’s blog post explained how filing bankruptcy during December can be smart if you receive extra income that month. It can help you qualify for Chapter 7, and avoid being forced into a 3-to-5-year Chapter 13 case. Today we lay out an example to show how this would work.

The Example

Let’s assume that the median income amount for your family size in your state is $64,577.

(That’s the current amount for a family of 3 in Kentucky. You can find the median income amount applicable to you on this chart. It’s from the means testing webpage of the U.S. Trustee Program. The chart is current for bankruptcies filed starting November 1, 2018, and is updated about three times a year.)

Assume that your regular family monthly gross income is $5,000, which would give you an annual income of $60,000. That’s less the median income amount of $64,577 provided above. So you’d think that you’d easily pass the means test.

But let’s also assume that you and/or your spouse were to receive an extra $2,500 during December. This money could be from a seasonal job, overtime, a bonus, or just about any other source.

Filing Bankruptcy During December

What would happen here if you filed a Chapter 7 bankruptcy case during December? The income that would count for the means test would be what you received during the six full calendar months before the date of filing. You don’t count anything received in December; only income during June through November counts.  That would be 6 months of $5,000, or $30,000; multiply that by two for an annual income of $60,000.  

Since $60,000 is less than the $64,577 applicable median family income amount, you’d handily pass the means test. You’d qualify to file a Chapter 7 case.

Waiting to File Bankruptcy After December

If instead you tried to file a Chapter 7 case in January, your income under the means test would be higher. The pertinent 6-month full calendar month period would now be from last July through December.  On top of the usual $5,000 income for 6 months—$30,000—you’d add the extra $2,500 money received in December. So the 6-month total would be $32,500. Multiply that by two for an annual income of $65,000.

Since $65,000 is more than the $64,577 applicable median family income amount you’d not immediately pass the means test. You may not qualify for filing a Chapter 7 case. Instead of likely being able to discharge (legally write off) many or possibly all of your debts within about 4 months you may be forced to pay on them for 3 to 5 years in a Chapter 13 case.

Having Income More Than Median Family Income

Even in this scenario of too much income, there’s a chance you could still pass the means test and qualify for Chapter 7. You’d complete the very complicated 9-page Chapter 7 Means Test Calculation form. Then if your “allowed expense deductions” leave you with too low of “monthly disposable income” you’d still pass the means test. (Whether your “monthly disposable income” is low enough turns on a formula comparing that amount to the amount of your “total nonpriority unsecured debt.”) Or you might also qualify for Chapter 7 by having expenses that qualify under “special circumstances.”

But these alternative ways of trying to qualify for Chapter 7 are much riskier than simply having less income than your applicable median family income amount. Our example above shows how to accomplish this with smart timing. You may be able to do the same by simply filing your case in December, or in whatever month would be most favorable for you.

 

What Is a “Means Test” and How Does It Affect Bankruptcy?

November 15th, 2018 at 9:01 pm

Texas bankrutpcy lawyerThere are not very many requirements when it comes to filing for bankruptcy in the United States. The requirements differ depending on what kind of bankruptcy you are filing for: Chapter 7 or Chapter 13. Both types of bankruptcies will affect your finances, but a Chapter 7 bankruptcy forgives all of your debt, while a Chapter 13 bankruptcy creates a repayment plan for three or five years. Because of this, it can be harder to obtain a Chapter 7 bankruptcy because the requirements are a bit more strict. One of the ways it is determined if you are eligible for a Chapter 7 bankruptcy is by using a “means test,” which basically determines whether or not you can afford to pay back your debts.

Part One: Calculating Your Income

This part of the means test is basically looking at your income to determine whether or not your household’s income is below your state’s median level. This is accomplished by filling out all of the required forms. The court will look at your total household income and compare it to the median household income for the size of your family. For bankruptcy cases filed in Texas after November 1, 2018, the median income for a family of four people is $81,958. The means test is based on the past six months, but it also takes into consideration recent or upcoming changes, like a job loss.

Part Two: Calculating Your Debt

Next, you will be required to disclose your allowable expenses, which can be things such as rent, groceries, clothing, medical costs, car payments, and other things. The court will look at your income versus your allowable expenses and determine whether or not there is anything left over at the end of the month that could be put toward paying off your debt. You must disclose all of your expenses and the amounts for them, or your case could be dismissed.

What Now?

If you pass the means test, you qualify to file a Chapter 7 bankruptcy. If you fail the means test, you still may be allowed to proceed with a Chapter 7 bankruptcy, but your best option might be a Chapter 13 bankruptcy, which helps you develop a repayment plan to pay back your debts over three to five years.. If you still want to proceed with a Chapter 7 bankruptcy, you can wait another six months to see if your financial situation will pass the test.

Get in Touch With a New Braunfels Bankruptcy Attorney

Though DIY is all the rage these days, a bankruptcy is not something that you want to attempt to do yourself. If you are thinking of filing for bankruptcy, you need to contact a skilled Kerrville bankruptcy lawyer. Bankruptcy can be confusing, but the Law Offices of Chance M. McGhee is here to help. Contact us to get help with your entire bankruptcy process. Do not go it alone – call the office today at 210-342-3400 to set up a consultation.

 

Sources:

https://www.nerdwallet.com/blog/finance/bankruptcy-means-test/

https://www.thebalance.com/the-means-test-overcoming-the-presumption-of-abuse-316358

Pass the Means Test by Filing Bankruptcy in 2018

November 12th, 2018 at 8:00 am

The timing of your bankruptcy filing can determine whether you qualify for quick Chapter 7 vs. paying into a Chapter 13 plan for 3-5 years.

 

Timing Can Be SO Important

There are lots of ways you could greatly benefit from meeting with a bankruptcy lawyer sooner rather than later. You may save yourself lots of money by choosing an option that would not be available to you later. 

There are many situations this could happen. Today we’ll address how filing sooner—say, before the end of 2018—might enable someone to pass the “means test” when that might not be possible later. Passing the means test means you’d likely qualify to file a Chapter 7 “straight bankruptcy” case. Otherwise you may be required to file a Chapter 13 “adjustment of debts” case.

Chapter 13 can be great in the right circumstances. But you don’t want to be forced into filing one quickly because you’re desperate for immediate relief from your creditors. If you had to file a Chapter 13 case because you didn’t have the flexibility to strategically time your filing, this could easily cost you many thousands of dollars. It could mean that you couldn’t discharge most of your debts in a matter of 3-4 months without paying anything on them vs. paying on those debts for 3 to 5 years.

Timing and Income in the Means Test

The means test requires people who have the “means” to do so, to pay a meaningful amount on their debts. If you don’t pass the means test you’re effectively stuck with filing a Chapter 13 case.

Be aware that a majority of people who need a Chapter 7 case successfully pass the means test. The most direct way to do so is if your income is no larger than the published “median income” amounts designated for your state and family size. What’s crucial here is the highly unusual way the means test defines income. This unusual definition creates potential timing advantages and disadvantages.

The Means Test Definition of Income

When considering income for purposes of the means test, don’t think of income as you normally would. Instead:

1) Consider almost all sources of money coming to you in just about any form as income. Included, for example, are disability, workers’ compensation, and unemployment benefits; pension, retirement, and annuity payments received; regular contributions for household expenses by anybody, including a spouse or ex-spouse; rental or other business income; interest, dividends, and royalties. Pretty much the only money excluded are those received under the Social Security Act, including retirement, disability (SSDI), Supplemental Security Income (SSI), and Temporary Assistance to Needy Families (TANF).

2) The period of time that counts for the means test is exactly the 6 full calendar months before your bankruptcy filing date. Included as income is ONLY the money you receive during those specific months. This excludes money received before that 6-month block of time. It also excludes any money received during the calendar month that you file your Chapter 7 case. To clarify this, if you filed a Chapter 7 case this December 15th, your income for the means test would include all money received from exactly June 1 through November 30 of this year. It would exclude money received before June 1 or received from December 1 through the date of filing.

The Effect of this Unusual Definition of Income

This timing rule means that your means test income can change depending on what month you file your case. To the extent you have flexibility over when to file, and if there are any shifts in the money you receive over time, you have some control over how much your income is for the means test when you do file your case.

So if you receive an unusual amount of money anytime in December, it doesn’t count if you file a Chapter 7 case by December 31. This unusual amount of money might be an employer’s annual bonus, a contribution from a parent or relative to help you pay expenses, or an unexpected catch-up payment of spousal/child support. Remember, if you file bankruptcy in December, only money received June through November gets counted.

Even relatively small differences in money received can make an unexpectedly big difference. That’s because the six-month income total is doubled to arrive at the annual income amount. So for example let’s say you got an extra $1,500 from whatever source(s) in December. If you file in December that extra doesn’t count, as just discussed above. But if you wait until January to file, December money is counted becasue the pertinent 6-month period is now July 1 through December 31. That extra $1,500 gets doubled, increasing your annual income by $3,000. That could push you above the designated “median income” for your state and family size. If so you’d likely not pass the means test and not qualify for Chapter 7, leaving you with Chapter 13 as your only option.

Conclusion

It is a fact that most people wait way too long before their initial consultation meeting with a bankruptcy lawyer. There are many very understandable reasons for this. But do yourself a favor and be the exception. See a lawyer not because you’re at the very end of your rope and need immediate relief from your creditors. Instead see one because you want to learn about your options. Do this sooner and you may have some significantly money-saving options that you might not have had otherwise. 

 

The Surprising Benefits: Keeping Your Vehicle Lease under Chapter 13

November 5th, 2018 at 8:00 am

You can keep your leased vehicle under Chapter 7 if you’re current. If not, or have other reasons to do a Chapter 13 case, that’s works too.


Lease Assumption under Chapter 7

Our last blog post showed how to keep a leased vehicle by “assuming” the lease in a Chapter 7 case. This means you keep making the lease payments. You also continue being legally bound by all the other terms of the lease contract.

Problems under Chapter 7

But what if you’re behind on your lease payments, and can’t catch up right away? Very likely the lessor would not allow you to assume the lease. And even if you could you’d be in default on the lease immediately and subject to repossession. You could easily end up owing a substantial amount of damages, and still be without a vehicle.

The Solution under Chapter 13

Filing a Chapter 13 “adjustment of debts” case solves this problem by giving much you more time to catch up on late payments.

A Chapter 13 case revolves around a formal court-approved payment plan that you and your bankruptcy lawyer put together. Your Chapter 13 plan will have a provision stating that you are assuming the unexpired vehicle lease. See Part 6 of the Bankruptcy Court’s official Chapter 13 Plan form. Besides listing the name of the lessor, a short description of the leased vehicle, and the monthly payment, you state the “Amount of arrearage to be paid” and the terms by which it will be paid through the plan. Usually you can catch up on the arrearage under terms that would fit within your budget.  

There is an opportunity for objection to such terms, particularly by the lessor. But usually the lessor is happy that you are choosing to continue being liable on the lease contract. Unless your payment history is terrible, or you’ve violated the lease agreement in other ways (such as not keeping insurance in effect) you’re mostly not going to get any objection. If there’s no objection, or any objection is resolved, the bankruptcy judge will approve or “confirm” the plan. (This assumes that the plan is otherwise ready for confirmation.)

This gives your proposed way of dealing with the lease, including the missed payments, the force of a court order. As long as you comply with those terms you’ll be able to keep your leased vehicle.

Limited Benefit on Leased Vehicles with Chapter 13

Chapter 13 gives you less possible advantages with a vehicle lease than if you had a vehicle loan. There is no opportunity for a Chapter 13 “cramdown” with a lease. A loan cramdown potentially reduces the loan’s monthly payments and the total amount paid to own the vehicle free and clear. Chapter 13 does not enable you to reduce your monthly lease payment. It does not take a penny off what you have to pay over the life of the lease.

Chapter 13 merely allows you to keep a leased vehicle through its lease term. The only real advantage it gives you over Chapter 7 is giving you more time to catch up on any unpaid lease payments. That may be an important advantage if you are desperate to keep the vehicle and are behind.

But be careful. Be aware that if you assume the lease under Chapter 13 you continue being liable on the other terms of the lease. For example, at the end of the lease you could owe money for high mileage or extra wear and tear. You could even lose the vehicle if you didn’t keep up the monthly lease payments. On top of that you could owe additional penalties for early termination of the lease.

Conclusion

Do you need a Chapter 13 case for any of the many other advantages it can give you? Then you will likely also be able to keep your leased vehicle as you’re dealing with those other issues.

Are you behind on your leased vehicle and absolutely want to keep it? Are you fully aware of the possible disadvantages of staying in your lease (partially outlined above)? If so, then Chapter 13 provides a way to keep your leased vehicle by catching up on the missed payments over time while you are protected from repossession.

 

The Surprising Benefits: Keeping Your Vehicle Lease under Chapter 7

October 29th, 2018 at 7:00 am

If you file a Chapter 7 case and write off your other debts, will you want to keep your vehicle lease? You can if you’re current on it now.

 

Our last three blog posts have been about rejecting a vehicle lease and giving the vehicle back to the lessor. You can do this either through Chapter 7 or 13. The result is the same in the end.  Assuming you successfully finish the bankruptcy case, you’ll forever discharge (legally write off) any debt you’d owe afterwards.

But you can also usually keep a leased vehicle. Depending on your circumstances, you can “assume” the lease in either a Chapter 7 or 13 case. Today’s blog post is about how this works in a Chapter 7 case. Next week we get into keeping a leased vehicle in a Chapter 13 one.

“Assuming” Vehicle Lease

When you file bankruptcy you make a formal choice about whether or not you want to “assume” the lease. Assuming an unexpired lease generally allows you to keep the vehicle while continuing to be legally bound by the lease contract. You give up the option to reject the lease and discharge—forever write off—any financial obligations on that contract. (Section 365(a) of the U.S. Bankruptcy Code.)

The “Statement of Intention”

To formally assume the lease in a Chapter 7 “straight bankruptcy” case you say that’s want you want to do in the court documents your bankruptcy lawyer prepares for you. In the “Statement of Intention for Individuals Filing Under Chapter 7” “List Your Unexpired Personal Property Leases” (on page 2). After stating your lessor’s name and the vehicle being leased, there’s a simple question: “Will the lease be assumed?” Check the “Yes” box.  Your bankruptcy lawyer files this Statement of Intention at the Bankruptcy Court (electronically). He or she also delivers a copy of to the lessor. (See Bankruptcy Rule 1007(b)(2).)

You and your lawyer must file this document within 30 days of filing your bankruptcy petition. Often it’s filed with your initial bankruptcy petition and the rest of your documents at the beginning of your case.

Consequences of Assuming the Lease

Be fully aware of the potential consequences before you assume the lease. Filing a Chapter 7 case gives you the opportunity to cancel your lease contract without owing anything. Assuming the lease gives up that opportunity.

If you assume and then in the future you couldn’t make the monthly lease payments, the lessor would take back the vehicle. Then the lessor could sue you for the amount you still owe on the lease contract.

Even if you make all the required monthly payments, you may still owe money at the end of the lease. You could owe substantial charges for excess mileage or damage to the vehicle. You could potentially owe thousands of dollars, and again be sued if you did not pay.

There are situations when it makes sense to keep a leased vehicle by assuming the lease in bankruptcy. But be sure you think about the benefits of getting out of the lease, and understand the risks.

When Chapter 13 Helps You Keep Your Leased Vehicle

In a Chapter 7 case you should generally be current on the monthly payments in order to assume the lease. If you’re not current, be sure that you can immediately get current. If you can’t, the lessor will very likely not allow you to assume the lease.

If you are behind but definitely want to keep the leased vehicle, Chapter 13 may be your better option. It usually gives you much more time to catch up on the missed payments. That’s the topic of our next blog post.

 

Debunking the Three Biggest Bankruptcy Fears

October 26th, 2018 at 8:25 pm

TX bankruptcy attorneyNearly 800,000 Americans file for bankruptcy each year, while millions more struggle with the decision filing. Often, those weighing the decision to file are doing so under the pressure of constant collection calls, the stress of impending foreclosure or repossession, and without all of the information necessary to make an informed decision. Let us help alleviate some of those fears:

Concern 1: My credit will be ruined.

While it is true that you will experience a decline in your credit score initially, also consider the impact late payments have on your credit score. While it may not be an immediate dramatic decline, the slow loss of credit from delinquency can be more harmful than bankruptcy.

As far as being able to apply for a credit card, a mortgage, or a car loan, all of these options will be available to you much sooner than you may anticipate. Many creditors are willing to offer you a credit card as soon as you complete your filing since they know you will be unable to file for bankruptcy again for an extended length of time. Furthermore, borrowers begin qualifying for new mortgages as soon as one year after the completion of a bankruptcy filing.

Concern 2: I will lose everything.

The thought of being homeless and without transportation often scares many families into coping with the onslaught of collection attempts. In reality, only 2% of debtors must turn over their personal property and real estate equity. According to the Texas homestead exemption, as long as you have lived in your home for 40 months or more, you will not lose your home, regardless of how much equity you have in it. If you live in a suburban area, you can keep up to ten acres of land, or if you are in a rural area, you can keep up to 200 acres per family or 100 acres for individual bankruptcy.

Concern 3: Everyone I know will find out I filed for bankruptcy.

We often hear of bankruptcy on the news, but rarely is it anyone we know intimately. While bankruptcy is a matter of public records, the only time it will potentially make headlines is if you have a high profile case. Many newspapers choose not to publish bankruptcy records now to save on publication costs.

A New Braunfels Bankruptcy Attorney Can Help

If you are one of the millions of Americans struggling to make ends meet, a Kerrville, TX bankruptcy attorney will help answer any questions you may have. Attorney Chance M. McGhee has over 20 years of experience with assisting clients to overcome the financial crisis. Call our office at 210-342-3400 to find out how we can help in a free initial consultation.

 

Source:

https://www.thebalance.com/the-three-biggest-bankruptcy-fears-316359

The Surprising Benefits: Ending Your Vehicle Lease under Chapter 13

October 24th, 2018 at 7:00 am

Chapter 7 gets you out of a vehicle lease owing nothing. Chapter 13 is more complicated but can give you pretty much the same good result.

 

Ending a Vehicle Lease in Chapter 7

Our last blog post was about how a Chapter 7 “straight bankruptcy” can get you out of a vehicle lease. You can “reject” a financially bad lease, and then discharge (permanently write off) whatever you’d owe after surrendering the vehicle. Otherwise you could owe a lot of money when you get out of the lease.

So if you decide that you don’t want to keep your leased vehicle, and need bankruptcy relief, Chapter 7 is likely the cleanest solution.

Ending a Vehicle Lease in Chapter 13

But what if you have other reasons to file a Chapter 13 “adjustment of debts” case instead? Chapter 13 can be a great way to save your home, catch up on child or spousal support, deal with income tax debt, and solve many other big financial problems, much better than under Chapter 7.

So it’s good news that you can surrender your leased vehicle through Chapter 13 just like under Chapter 7. However, discharging any resulting debt from the lease contract is not as straightforward as in a Chapter 7 case. Here’s how it works.

Possible Debts from Surrendering a Leased Vehicle

First be aware that you could owe various kinds of debts when you surrender a leased vehicle. Surrendering before lease end could make you liable for contractual penalties and/or all the remaining unpaid lease payments. Surrendering the vehicle at the end of the lease could make you liable for high mileage, excessive wear and tear, and the difference between the vehicle’s originally anticipated value at the end of the lease and the actual “realized value” then. Either way the amount you would owe could be thousands of dollars.  

Rejecting the Lease under Chapter 13

Under Chapter 13 you have the options of either rejecting the lease and returning the car, or continuing the lease. For today we’re assuming you no longer need or want to keep and pay for the vehicle.

The immediate benefits of rejecting the lease are just like under Chapter 7. You immediately stop paying the monthly lease payments, and then return the vehicle to the lessor after filing the case. If you’re behind on payments, you don’t have to pay them.

But under Chapter 13 there’s a complication. Your lessor can file a “proof of claim” reflecting whatever amount you would owe under the lease contract. The lessor does so in order to try to get paid part of any remaining debt. This debt is then added to the pile of all your other “general unsecured” debts.

The Category of “General Unsecured” Debts in Chapter 13

In a Chapter 13 case, your debts are divided into categories, one being your “general unsecured” debts. These are the debts that are 1) not secured by any of your property or possessions, and are also 2) not a “priority” debt (various specially-treated ones).

Often you have to pay all or most of what you owe on your secured and priority debts. But this is seldom true with general unsecured debts. Often you pay little or even nothing on your general unsecured debts in a Chapter 13 case. Whether or how much you pay depends on a lot of factors. The main factors are the amount of your secured and priority debts, and how much you can afford to pay to all of your creditors after expenses.

Often Vehicle Lease Debt Does Not Increase What You Pay

In most Chapter 13 cases a debt from surrendering your leased vehicle does not increase what pay in your case. That is, adding what you owe on the lease to your other general unsecured debts does not increase the amount that you pay into your pool of general unsecured debts.

There are two circumstances where that happens, one less common and other very common.

First, in some parts of the country you are allowed to pay 0% of your “general unsecured” debts. This happens if all you can afford to pay during your 3-to-5-year payment plan goes to your secured and priority debts. This leaves no money for the general unsecured debts. Paying 0% of the general unsecured debts means paying 0% on any vehicle lease debt.

Second, in most situations you end up paying the pool of general unsecured debts a specific amount of money. That amount is what you can afford to pay through the plan minus what goes to secured and priority debts. That specific amount gets divided up among the general unsecured debts. This amount being paid to the general unsecured debts does not increase if there is more of those debts. Adding the debt from the surrendered leased vehicle just reduces the amount other general unsecured debts receive. It does not increase how much you pay.  

For example, assume that after you pay all your secured and priority debts you have $2,000 left over to pay all your general unsecured debts over the life of your Chapter 13 plan. Your vehicle lessor files a claim saying you owe $3,000 after surrendering the vehicle. You owe $30,000 to all your other general unsecured debts. Adding the $3,000 lease debt to the other $30,000 means you owe a total of $33,000 of general unsecured debts. But you pay only the $2,000 that is available (over the life of the plan) either way. Having the $3,000 lease debt just means that the other general unsecured debts receive that much less.

 

The Surprising Benefits: Rejecting Your Vehicle Lease under Chapter 7

October 15th, 2018 at 7:00 am

Getting out of a vehicle lease in a Chapter 7 case requires simply that you formally state that you “reject” it. Then you owe nothing more.

 

Last week we showed how a vehicle lease can be unexpectedly expensive, and that you can escape through Chapter 7. Today we show you how.

The Option of “Rejecting” the Lease

When you file bankruptcy you get to choose whether or not to keep your leased vehicle. Specifically you choose to either “assume” or “reject” the lease. Assuming the lease means keeping the vehicle and continuing to be legally bound by all the terms of the lease. Rejecting the lease means letting the vehicle go. This allows you to “discharge”—forever write off—all of your financial obligations on the lease. (See Section 365 of the Bankruptcy Code generally about the assumption and rejection of unexpired leases. Warning: it’s very complicated and confusing!)

Rejecting a car or truck lease can be a good idea in various situations. As we discussed last week leases come with a number of hidden costs and financial risks.

If you can’t make the lease payments and surrender the vehicle, you will most likely owe a lot of money. Or if you’re nearing the end of your lease and the vehicle has high mileage or unusual wear and tear, you can also owe a lot. Rejecting your vehicle lease in bankruptcy at any point in the lease gets you out of it without having to pay anything more on it.

Giving Notice of Lease Rejection

To reject the lease, you simply state your intention to do so. You do that in the Chapter 7 documents that your bankruptcy lawyer prepares for you. The specific form is appropriately called the “Statement of Intention for Individuals Filing Under Chapter 7.” As you can see on the form itself, on page 2 you “List Your Unexpired Personal Property Leases.” (A vehicle is “personal property.”) So you state your lessor’s name and the vehicle being leased, and whether or not you’re “assuming” the lease. If you are not assuming it you are deemed to be rejecting it.

Your bankruptcy lawyer delivers a copy of the Statement of Intention to the lessor and the trustee. (See Bankruptcy Rule 1007(b)(2).)

Timing of the Statement of Intention

Your lawyer must file/deliver the Statement of Intention within 30 days after the filing of your Chapter 7 case. If your “meeting of creditors” happens to be before then, the deadline to file is the date of that “meeting.”

If you don’t file/deliver this form by this deadline the lessor can then immediately repossess the vehicle. In other words the protection against repossession—called the “automatic stay”—that you imposed by filing your case expires if you don’t file/deliver the Statement of Intention on time. (See Section 362(h)(1)(A) of the Bankruptcy Code.)

Often the Statement of Intention gets filed the day you file all your other documents. But your lawyer may wait until the later deadline to file to give you more time with your vehicle. That’s because the “automatic stay” also expires if you don’t “take timely the action specified in such statement.” (Section 362(h)(1)(B).)

The Lessor’s Reactions

At any point your lessor may file a motion asking for permission to take possession of the vehicle. This is also called a motion for relief from the automatic stay or to lift the automatic stay. The faster the lessor gets possession the faster it can resell it and recoup some of its losses. So sometimes a lessor will file such a motion to make sure it gets possession as fast as the law allows.  

But often a lessor just relies on your Statement of Intent and the expiration of the automatic stay as described above. It doesn’t file a motion but just communicates with your lawyer to arrange for your surrender of the vehicle at a time that is reasonable for both you and the lessor.

So, talk with your bankruptcy lawyer, both about whether you should reject your lease, and how to best do so.

 

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